Chapter 6 - Organisational Decision Making

My notes on chapter 6 - Organisational Decision Making

There are 3 paradigms;

1. Rational Choice
2. Imperfect-rationality paradigm
3. Dual-process paradigm of decision making

The Rational Choice Paradigm

• assumes people make judgements that are logical and internally consistent with their goals and preferences.
• ie their choices will have the highest subjective expected utility among the available alternatives
• Subjective expected utility (SEC) : to the extent to which the selected alternative benefits or satisfies the decision-maker.
• "Logic dictates that the decision maker selects the alternative with the highest expected utility because rational people strive to maximise their wellbeing. this formula is called 'subjective' because the valence of outcomes and the probabilities of those outcomes are percieved by the decision-maker rather than objectively calculated from the environment.

The imperfect-rationality paradigm

• "while rational choice assumes that decision makers have complete knowledge of the exact consequences of each alternative, this knowledge is actually 'fragmentary' in hat outcomes are difficult to predict"
• "While rational choice assumes that decision makers choose from a large set of alternatives, only a few of these alternatives actually come to mind"
• bounded rationality states that people actually choose the first alternative that is 'good enough' A good enough alternative is one that is satisfactory in the context of the decision-makers aspirations. -> this refers to the term satisficing
  
• Herbert Simon (Economist from 1930s) he addressed the argument that since people do not apply perfect rationality, the must be somewhat irrational
• Procedural Rationalilty: to the notion that these short cuts represent the most rational decision process under conditions of limited knowledge of the environment and limisted information-processing capacity. "In other words bounded rationality economises the decision makers effort and avoids information overload so that a timely decision can be made"

• Heuristics are unstructured modes of reasoning without deliberate calculations or analysis to estimate the subjective probabilities or frequencies of events or objects. An example an exec might believe that the best decisions affecting customers reply on employee input. This heuristic which was likely learnt and reinforced from experience, helps the decision-maker to estimate a higher probability of success.
• There are three/four widely research heuristics.
• Availability heuristic - objects and events that are easier to remember and associate are assigned higher probabilities. Tversky and Kahneman found evidence that people rely on their ease of collection of information to help them complete the challenging task of estimating the probability or frequency of an event.
  
• Representative heuristic - states that people tend to evaluate probabilities of events or objects by the degree to which they resemble (or are representative of) other events or objects. This biasing effect of this heuristic takes several forms. An example is stereotyping of people.
• Anchoring and adjustment heuristic - states that our estimates of things are influenced by a preconceived anchor point. 'the anchor point is typically a rough starting point, and our adjustment away from that anchor tends to be overly conservative.
• Other studies of anchoring and adjustment have reported that the initial offer position in negotiations affects the final point where the parties reach agreement. <-- This is me.. :(
• Prospect theory - T & K found that people do not view gains and losses with the same degree of preference, as is assumed in subjective expected utility theory. Eg: most people prefer the choice of definitely receiving $50 rather than a 50% probability of receiving $100 (vs $0). therefore : "people are less risk-inclined when receiving gains and take more risks when faced with losses"
  
• "An important observation from this body of ork is that these heuristics seem to apply fairly consistently, suggesting that they are hard-wired rather than learnt" Therefore difficult to alter human decision making so that people minimise these biases.

Escalation of Commitment
This is the tendency to repeat an apparently bad decision or to allocate more resources to a failing course of action. "the most widely accepted explanation for the escalation phenomenon states that decision makers are motivated to maintain their course of action when they have a high need to justify their decision. == self justification effect.

• 'Equivocality theory of escalation': suggests that continuing to invest in an apparently failing project may indeed represent a form of procedural (imperfect) rationality.

Dual process paradigm - we make decisions emotionally before we engage in rational or imperfectly rational analysis of the situation.